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International Ethanol Model

The FAPRI/CARD International Ethanol Model examines and projects the production, use, stocks, prices, and trade for ethanol for several countries and regions of the world.

Structure of the FAPRI/CARD International Ethanol Model

The international ethanol model is a non-spatial, multi-market world model consisting of a number of countries, including a Rest-of-World aggregate (ROW) to close the model. The model specifies ethanol production, use, and trade between countries. Country coverage consists of the Canada, China, European Union (EU-27), India, Japan, South Korea and ROW. Additionally, there are ethanol sub-models embedded within the U.S. and Brazil integrated agricultural models, which are linked to the international ethanol model.

The general structure of the country model is made up of behavioral equations for production, consumption, ending stocks, and net trade. Complete country models are established for the U.S. and Brazil (within their respective integrated models), Canada, China, EU-27 and India while only net trade equations are set up for Japan, South Korea and ROW because of limited data. The model solves for a representative world ethanol price by equating excess supply and excess demand across countries.

The Brazilian anhydrous ethanol price is used as the world ethanol price, which is a standard assumption as Brazil is the major exporter of ethanol. Using price transmission equations, the domestic price of ethanol for each country is linked to the representative world price through exchange rates and other price policy wedges. An exception is the U.S., which is nearly insulated from the world market, given its import tariffs on non-preferential ethanol imports. The U.S. model solves endogenously for the ethanol price that clears the domestic market (unless international prices are low enough relative to the domestic price). All prices in the model are expressed in real terms.

The derived demand for ethanol feedstock is country specific. Sugarcane is the main feedstock in Brazil, while corn and wheat are responsible for most of the ethanol production in the U.S. and the EU-27, respectively. Countries like India use molasses instead of sugarcane as the main feedstock for ethanol production. Brazil and the U.S. are the major players in the ethanol market.

In the U.S., ethanol is produced from corn using either a wet-milling or a dry-milling process. Total ethanol production is the sum of ethanol produced from corn through the dry and wet milling process, ethanol produced from non-corn sources and ethanol produced from cellulosic feedstock. Ethanol demand in the United States is composed of three markets: the additive, voluntary E-10, and E-85 markets with the additive market being the least responsive to changes in the price of ethanol and the E-85 market being the most elastic component of the ethanol demand. The derivation of ethanol demand is based on the total motor gasoline demanded in the U.S. The total ethanol use is the sum of all uses in the additive, voluntary and E-10 markets. If the sum falls below the Renewable Fuel Standard (RFS), then the RFS holds. The price ratio of U.S. ethanol price to the world ethanol price determines the U.S. ethanol net trade.

In the Brazilian agricultural model, the area allocated to sugarcane in Brazil depends on the expected returns to sugarcane, relative to other potential activities competing for land. Expected returns to sugarcane follow from a composite of the expected prices of sugar and ethanol, and sugar content of the cane. The fraction of the total recoverable sugar (the feedstock for sugar and ethanol) used to produce ethanol depends on the price of ethanol relative to that of sugar. The remainder is used for sugar production. On the domestic demand side (for transportation), ethanol is consumed in anhydrous and hydrous forms. The anhydrous form is consumed in mandatory blends with gasoline (25% ethanol), by gasoline cars. Hydrous ethanol is mainly used by flexible fuel vehicles (FFVs) but also by gasohol cars. FFV owners can choose between ethanol and gasoline (blended), and their choice is quite sensitive to the relative prices of these two fuels.

In general, data for ethanol supply and utilization are obtained from USDA'S Global Agriculture Information Network (GAIN) Reports, the Energy Information Agency, the European Commission Directorate General for Energy and Transport, the Brazilian Institute of Geography and Statistics (IBGE) and the Brazilian Ministry of Agriculture’s National Supply Company (CONAB). Macroeconomic data were gathered from various sources, including the International Monetary Fund and Global Insight.

View the current FAPRI-ISU 2011 World Agricultural Outlook.

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